The breakeven rate (or breakeven yield change) is the amount by which yields can rise before a long bond position turns unprofitable. It combines the two sources of positive return that cushion against rising yields: carry and roll-down.
Breakeven = (Carry + Roll-down) / Modified Duration
For example, if a 10-year Treasury has +50 bps of annualized carry and roll-down combined, and a modified duration of 8.0 years, the breakeven yield rise is 50 / 8.0 = 6.25 bps per year. If 10-year yields rise by less than 6.25 bps over the next year, the position is profitable. If they rise by more, the capital loss exceeds the income.
Breakeven analysis is central to:
Assume the current 10-year Treasury yields 4.40% and the overnight repo rate (GC) is 5.30%. Carry is negative here: 4.40% minus 5.30% = -90 bps per year. On a funded basis, this position costs 90 bps annually just to hold.
Now add roll-down. If the 9-year Treasury yields 4.25%, the curve drops 15 bps over the final year of the 10-year's life. Holding for one year and rolling down to the 9-year point earns approximately +15 bps.
Combined: -90 + 15 = -75 bps per year.
Modified duration for a 10-year Treasury at 4.40% yield is approximately 8.0 years.
Breakeven = -75 / 8.0 = -9.4 bps per year.
A negative breakeven means yields must fall, not rise, for the position to break even. In this inverted-curve environment, an unfunded long at the 10-year point requires a rally of at least 9.4 bps just to cover the cost of carry. This is precisely the kind of environment where breakeven analysis disciplines trade selection.
In a steep curve, the 5-year point typically offers a higher breakeven than the 10-year point, for two compounding reasons. First, the curve near the 5-year is usually steeper (bps per year) than near the 10-year, so roll-down is larger relative to the holding period. Second, modified duration at 5 years is roughly 4.5 years versus 8.0 years at 10 years, so the denominator is smaller. A larger numerator divided by a smaller denominator produces a meaningfully wider breakeven at 5 years.
In a flat curve, both effects shrink. Roll-down collapses toward zero across maturities, and the duration difference matters less when carry and roll-down together barely clear 10 bps anywhere on the curve. Flat-curve environments expose all maturities to thin or negative breakevens, which is why active managers shorten duration or go flat in those conditions.
YieldCurve.pro's Forwards page plots the current forward curve, letting you read off roll-down visually at any maturity point.
The breakeven yield change is mathematically equivalent to the gap between the implied forward rate and the current spot yield, divided by modified duration.
Breakeven = (Forward Rate - Spot Yield) / Modified Duration
If yields follow the forward curve exactly over the holding period, the investor earns the short-term rate and nothing more. This is one of the core results formalized in the Salomon Brothers yield curve primer (Part 6). The forward rate is not a forecast of future spot yields. It is the rate that must prevail for the investor to break even versus rolling the short-term instrument. Any outcome better than the forward curve generates alpha. Any outcome worse produces a loss.
This framing connects breakeven analysis directly to the forward curve on /forwards, where you can compare the current spot curve to the 1-year forward curve and identify where the market is pricing the most movement.
Portfolio managers use breakeven analysis at the trade-construction stage, before position sizing. The logic is straightforward: if your rate view is that 10-year yields rise 20 bps over the next 12 months, and the breakeven is 25 bps, the trade has a negative expected value even if your directional call is right. You need a rate view that exceeds the breakeven by enough margin to justify the risk.
This margin of safety is the "cushion." A breakeven of 30 bps with a rate view of 10 bps provides 20 bps of cushion. A breakeven of 5 bps with a rate view of 10 bps provides almost none. Experienced curve traders size positions partly based on how wide the cushion is relative to the uncertainty in their rate forecast.
Breakeven analysis also governs maturity selection within a duration target. If a manager must hold 7 years of duration, distributing that across the 5-year and 10-year points versus holding the 7-year outright depends on where the breakevens are widest. Compare roll-down at each point using /forwards before committing.
What is the breakeven rate? The breakeven rate is the yield rise that exactly offsets the carry and roll-down earned by holding a bond over a period. Below the breakeven, the position is profitable. Above it, the position loses money.
How is the breakeven rate calculated? Divide the sum of annualized carry and roll-down (in basis points) by the bond's modified duration. The result is the maximum yield rise the position can absorb while still breaking even over the holding period.
What does a negative breakeven rate mean? A negative breakeven means carry and roll-down are negative in combination. The position requires yields to fall just to reach profitability. This is common in inverted-curve or flat-curve environments where funding costs exceed coupon income.
How does the breakeven rate relate to the forward rate? The breakeven yield change equals the implied forward rate minus the current spot yield, divided by modified duration. If rates evolve exactly along the forward curve, the investor earns only the short-term rate. Use the Forwards page to read implied breakevens directly from the forward curve.